New Year, New Me!
Actionable Savings and Investing Advice That Actually Works
The Mistake
As we kickstart a new year, the usual flurry of resolutions gives way to exclamations of “new year, new me!” from the over-exuberant masses, all equally convinced that the mistakes of years past are all behind them and this year will ‘be my year’. Now I’m not here to rain on your parade. I’m all for resolutions. I just think expectations need to be managed if they are to be achieved.
I’m a huge advocate of self-improvement and the betterment of oneself. After all, progress is the key to success. With that said, we tend to get all consumed with changing everything all at once.
Unfortunately, the human condition doesn’t lend itself very well to instantaneous upgrades. You can’t go to bed one night and just decide to wake up the next morning as an upgraded version of yourself.
As much as I would love to be able to just wake up tomorrow as ‘Mike 2.0’ it just isn’t that simple. There are emotions, behavioural fallacies and endless unexpected scenarios around each corner, ensuring our progress is never linear.
Your day-to-day progress will undoubtedly waiver and fluctuate. The best we can hope for is to strive for steady improvements each year, and that’s something to be celebrated. Progress is progress after all. We can try a load of different approaches to self-improvement; some will stick, most won’t. Over time, these incremental improvements will positively compound.
In short, go easy on yourself, don’t get disheartened if you don’t automatically turn superhuman at the turn of the new year. Progress takes time, don’t give up just because the results weren’t as instantaneous as you imagined.
With my insufferable prologue out of the way, now it’s time to work in my subtle Segway.
Financial Fad Diets
This new year’s frenzy will undoubtedly have people breaking out their spreadsheets to do a line-by-line analysis of their budget, adamant they will be able to live on $7 a week after expenses; Squeezing every last drop of savings out of their earnings in a bid to make up for the previous 10 years of YOLO financing.
In truth, this approach reminds me of fad diets. Most of us have been there. You have put on a bit of extra weight, and in a bid to lose it as fast as humanly possible, you choose to take an extreme, entirely unsustainable and altogether unhealthy approach. At first, it works perfectly, you’re highly motivated, and those record-high numbers on the scales are starting to drop. Fantastic. But then life throws a curveball or your motivation slips. The unsustainable nature of your plan provides little margin for error, and you start to put back on some of the weight you had just lost, causing you to abandon the ‘cursed diet’, vowing never to return.
If you need diet advice, you have probably come to the wrong place, but I think we can all agree that a consistent, sustainable approach is far more likely to end in success in the long run for both weight loss and finance. While this approach lacks the instantaneous gratification we all crave and is often the boring answer none of us want to hear, it doesn’t make it any less effective.
So, instead of attempting fad dieting’s answer to financial planning, start small, take the little wins and build on them. Gather momentum over time. We all need to learn how to walk before we can run (even if you are eager to make up for lost time)
With this in mind, Let’s focus in on the most important initial step you need to incorporate as part of your broader financial plan before you start to think about investing.
START LIVING WITHIN YOUR MEANS!
This step is often overlooked but is of utmost importance. Investment strategies can offer fantastic returns but whether the market will co-operate is often in doubt, resulting in a degree of uncertainty. Personal savings and frugality are part of the money equations that is firmly in your control and has a 100% chance of being effective.
Start to live within your means
This is simply spending less than you make. It doesn’t have to mean holding yourself back or never indulging if it is done correctly, but if every increase in earnings is used to fund an increasingly lavish lifestyle, financial freedom will undoubtedly evade you.
This approach to living within your means focuses on 4 core principles
Focus on your values
Run the numbers
Eliminate high interest debt
Set up an emergency fund
Once these steps are in place, you have a solid base from which to start a broader investment plan
Focus on your values
If you are struggling to live within your means, take a step back and establish your values, what is truly important to you?
For some, this could be family, exploration, freedom… for others, it might be cars, watches and fancy clothes. I’m not here to judge; if these things make you happy, go for it but be aware of that and prioritise accordingly.
For me, it is where I live, time with family and friends and financial flexibility. I don’t really have any interest in cars or fancy clothes (my fiancé bemoans my Homer Simpson-esque monotonous revolving wardrobe, throwing me looks of disdain as I don a shirt she has seen 4,578 times before). I say all this in jest, but this is crucial to your financial wellness and something that took me far longer than it should have to figure out. I gain no extra utility from showing up in a nice car or dripping in gold, but I always presumed I wanted these things because they were a sign of wealth and other people had them.
This isn’t intended to be some spiel about how society is weighed down by material possessions. We are all going to spend our money in whatever way we see fit. Just make sure that these things are actually what you truly desire and not what others have convinced you will make you happy.
For me, one of the more materialistic values I mentioned is ‘where I live’. I have always wanted an audacious gaff (if it doesn’t have a helipad, I don’t want to hear about it). To some, this may seem grossly unnecessary, but each to their own. I don’t exactly know why or where this came from, but I take a lot of pride in where I choose to rest my head. Once I figured this out, I was able to prioritise my spending accordingly and forego some of the more short-term purchases that I would have previously been drawn to.
Once you clearly identify your values, you can begin to look at your lifestyle and curb spending on those things that don’t align with your values in favour of those that do.
Run the numbers
What gets measured gets improved -Robert Sharma
Seems a bit rich for me to preach about budgeting when I did everything in my power to spend every penny that came my way for most of my twenties, but who knows, perhaps as a reformed spendthrift, I am best placed to provide objective advice.
We have all been there, you’re 10 days into the month, and somehow you have 0.34c in your bank account. You pray it’s all just some hilarious misunderstanding but deep down, you know the truth.
A good way to counteract this disappearing money syndrome is to start tracking your spending. There are plenty of apps available to keep tabs on where your money is going. You might be shocked to realise how much you spend on frivolous items. One of my needless spending habits came in the form of endless subscriptions to things I had completely forgotten I was even subscribed to. Once you are aware of it, it becomes easier to change your behaviours. Each small change can significantly increase your overall wealth over time.
There are two key numbers you need to have a handle on when trying to save.
Your income: Simply anything that results in more money in your bank account at the end of the month.
Your expenses: We all tend to do a simple back of an envelope calculation of our income minus or day-to-day expenses such as groceries, electricity etc., but it is vital that you look ahead to identify any upcoming large expenses. Factoring in things like car and house repairs on a monthly basis will ensure you have funds available when these unwanted events inevitably happen.
Eliminating high-interest debt
Far too often, we borrow from the future, forgetting that we will eventually have to pay it back. Prioritising the repayment of high-interest debt that you have accumulated over the years with the cash you have on hand today prior to any investing or savings seems obvious. Still, people are slow to accelerate any payment plan because it involves actively giving away your money for seemingly nothing in return. In reality, you did get something in return; the problem is, you spent it 4 years ago on a trip to Vegas.
Set up an Emergency Fund
As mentioned previously, Emergency funds create a financial buffer that can keep you afloat in times of financial strain, preventing you from dipping into your portfolio at the least opportune time. 3 to 6 months of living expenses is typically a good rule of thumb. If you have a mortgage, kids etc., you may want to be on the higher end of this. If you have few overheads and strong job security, then 3 months may work for you.
There is nothing I can say here to make budgeting more appealing. The art of actively trying not to spend money is debilitatingly boring but a necessary short-term pain that must be endured if you have aspirations of travelling the world, early retirement or financial flexibility. Without actively trying to live within your means for a prolonged period, you will end up in an exhausting weekly routine of trading your time for money for the rest of your days. Entirely your choice.
If you are hell-bent on going the extreme saver route, then I wish you the best of luck. If a year of beans on toast and coupon collecting isn’t your cup of tea, then get started by assessing your values and go from there.
Below is an example of a more precise annual savings plan from the guys at ‘Ask Paul’. If you have a burning desire for quantifiable targets, then maybe sticking to a program similar to the below may help.
Again, you don’t have to jump in all at once; start small but start now.